Prior, Inc. has decided to raise additional capital by issuing $175,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of bonds, detachable stock warrants should be issued at a rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $150,000.

a) What entry should be made at the time of the issuance of the bonds and warrants?

b) If the warrants were nondetachable, would the entries be different? Discuss

Value assigned to bonds = (Value of bonds without warrants)*Issue price/ (Value of bonds without warrants + Value of warrants)

ie Value assigned to bonds = ($136,000 * $152,000)/($136,000 + $24,000) = $129,200

Value assigned to warrants = (Value of warrants)*Issue price/(Value of bonds without warrants + Value of warrants)

ie Value assigned to warrants = ($24,000*$152,000)/($136,000 + $24,000) = $22,800

Cash Dr.152,000

Discount on Bonds Payable Dr.$40,800

($170,000 – $129,200)

Bonds Payable Cr. $170,000

Paid-in Capital—Stock Warrants Cr. $22,800

When the warrants are non-detachable, separate recognition is not given to the warrants. The accounting treatment parallels that given convertible debt because the debt and equity element cannot be separated.

The entry if warrants were non-detachable is:

Cash Dr. $152,000

Discount on Bonds Payable Dr. $18,000

Bonds Payable Cr.170,000

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